ABOUT AMARIN CORPORATION (AMRN)
Amarin Corporation is a biopharmaceutical company founded in 1993 and headquartered in Bedminster, New Jersey. The company develops and markets medicines for the treatment of cardiovascular disease. It has developed the drug Vascepa (AMR-101), a prescription-grade omega-3 fatty acid.
RECENT SELLOFF PRESENTS AN OPPORTUNITY
With the Nasdaq trading well off its all-time record close of March 12, the price performance of biotechnology company Amarin (Nasdaq ticker: AMRN) has utterly been clobbered in comparison. After reaching a 52-week closing high of $4.44 on January 23, AMRN has succumbed to outsized selling pressure. As of the close of Friday’s trade, AMRN has lost about 33.9% of market capitalization within 13 weeks.
After all the volatility, beginning with the first crack appearing in the bull market on January 23, the Nasdaq has rallied back to only a modest 6.2% decline, while the IBB ETF has registered an 11.1% pullback. In stark contrast, the share price of AMRN has plunged a whopping 33.9% from its closing price high of Jan. 26, calculating to more than a 5:1 ratio of poor performance of AMRN when compared with the Nasdaq, and a 3:1 ratio of poor performance of AMRN when compared with its brethren which make up the IBB.
From what I read on the bulletin boards, many AMRN longs feel dejected and jittery about what this relative poor performance might portend for the company’s upcoming conclusion of the “Reduce-It” trial study for the company’s lead and only drug: Vascepa. That is to say: does someone know something bad coming from the Reduce-It study?
I issue this report about AMRN, because my analysis strongly suggests to me that the recent terrible price performance of AMRN is a grand opportunity for newcomers of the stock (as well as present shareholders of AMRN to buy more shares) to place a wager with me that fireworks to the upside will commence by the end of September.
And at the close of my report, I present a reasonable risk/reward calculation in order to better size your bet, if you choose to play this stock with me.
ETF SELLING & HIGH BETA ACCOUNT FOR STEEP STOCK PULLBACK
Before I get into what the company potentially offers traders of the stock, allow me to first tackle the issue of the conspicuous price decline of AMRN since January.
So, let’s take a look at my analysis of the recent performance of AMRN that has compelled me to issue this alert, in the first place. In total, I can arguably account for 100% of the stock’s recent 13-week decline.
Below, is a price chart of a superimposition of the price action between iShares NASDAQ Biotechnology Index (ETF: IBB) and the price action of the Nasdaq.
Note: chart constructed after close of trading on April 26 (Thursday)
Because of the domination of programmed trading in stock markets of the past 20 years, I like to use correlation studies as my first-line technique in my evaluation of a stock’s seemingly unusual performance divergence when compared with the performances of broader averages, and more specifically, the performances of ETFs. The primary reasoning behind this technique stems from my knowledge of how some of these ‘algos’ work, including my knowledge that many programs cross correlate like-securities to find potential trading opportunities.
As the price chart of the two securities demonstrates (above), the price of the IBB ETF has followed the price of the Nasdaq quite closely, with a calculated correlation coefficient of both data sets resulting to an R=0.87, or a correlation of determination of 0.757 (R2). Statistically-speaking, I, therefore, can infer that 75.7% of the price action of IBB is attributable to an overall market liquidation of biotechnology stocks since the end of January. Seventy-five percent is quite high, and is expected, as many correlation studies between sector ETFs and broader market averages result to a high correlation of determination.
Now, let’s take a look at a chart, below, of the superimposed price action of AMRN and IBB. Again, the price pattern is similar to the IBB/Nasdaq chart.
Note: chart constructed after close of trading on April 26 (Thursday)
In the case of the price of AMRN and the price action of IBB, the correlation coefficient is almost the same number as the correlation coefficient of the Nasdaq/IBB data sets. In the case of the AMRN/IBB data sets, the result of the correlation of determination equation calculates to 0.723, or an inference that 72.3% of the decline of price of AMRN is attributable to the decline of the sector.
Again, I’m not surprised.
Although AMRN comprises only 0.1% of the market capitalization of IBB, the number of shares traded that make up that 0.1% is large relative to the stock’s float. Therefore, as traders dump IBB, AMRN must be dumped by the dominate institutions managing these ETFs, as well.
But what about the disparity of percentage declines between AMRN and IBB? I, then, analyzed the relative volatility between the two securities and have account for all of the discrepancy.
According to the volatility calculation at finviz.com, the volatility of IBB has historically been quite low, which finviz calculates to between 1.81% and 2.31% (the standard deviation of the price data set/ mean price). On the other hand, the volatility calculation for the price action of AMRN is relatively high at between 6.84% and 6.26%, for a volatility ratio of 3.17:1 between AMRN and IBB. So, this back-of-the napkin calculation of the price performance of AMRN and IBB suggests to me that the decline of 11.1% of the IBB ETF, alone, accounts for the 33.9% decline of AMRN. The math is as follows: 11.1% x 3.17 / 33.9% = 103.7%.
Conclusion: the steep decline of the share price of AMRN can reasonably be attributed to the overall decline of the biotechnology sector.
In other words, discussions I’ve read on stock posting boards about the rapid decline of AMRN must, therefore, suggest that “someone must know something terrible” about the probable outcome of the “Reduce-It” trial study of Vascepa are mere banter between ‘nervous Nellies’. Most likely, the fortunes of those who hold AMRN won’t be decided until Q3, at which time results of the Reduce-It study becomes available to all of us. So, worrying about bouncing prices until then is a complete waste of energy.
Okay, now to a discussion about what really matters: the fundamentals of the stock.
THRILL OF VICTORY OR TRAGEDY OF DEFEAT RESTS UPON ‘REDUCE-IT’ STUDY
For those new to the AMRN trade, Amarin has successfully gained limited approval by Food and Drug Administration (“FDA”) on Jul. 26, 2012 for Vascepa (icosapent ethyl) “as an adjunct to diet to reduce triglyceride (“TG”) levels in adult patients with severe (TG greater than or equal to 500 mg/dL) hypertriglyceridemia (very high triglycerides)” according to Amarin’s website.
The FDA approval of Vascepa in July 2012 does not include approval of the drug as a prescribed treatment patients with TG levels between 200 mg/dL and 499 mg/dL, the level range of which is, by far, the largest portion of potential patients who might benefit from Vascepa. But, even without the opportunity to seize revenue from this large and lucrative group, Amarin has taken full advantage of selling to a much smaller patient group who register TG levels of more than 500 mg/dL (see chart. Below).
Since July 2012, Amarin has since successfully rolled-out Vascepa throughout the U.S., growing net revenue from the sale of the drug at a compounded annual rate (“CAR”) of 61.5% following initial revenue of $26.4 million during the year of 2013. The most recent revenue increase of $50.8 million reported for 2017 calculates to a 39.3% rate of growth from revenue reported for 2016, which is still a gang-buster rate at the present revenue levels of more than $100 million.
FOR TRADERS SEEKING A POTENTIAL ‘JACKPOT’, YOU’RE IN FOR A TREAT
The reason for my characterization of AMRN as a potential ‘jackpot’ play is due to the massive market that might suddenly become available to Amarin soon after Q3 of this year —if Vascepa is definitively shown via the Reduce-It study to improve TG levels of patients with readings of between 200 mg/dL and 499 mg/dL. It is precisely this target market that I anticipate spiking Amarin’s ‘honey hole’ of revenue approximately eight-fold within three years (analysis later in report). For veterans of the stock, this is their primary draw to AMRN.
So, let’s start my analysis here.
The chart, below, delineates the estimated percentage of the U.S. population with TG levels of 500-2,000mg/dL, 200-499 mg/dL, 150-199 mg/dL and 0-149 mg/dL, respectively.
From the chart, the FDA approval of Vascepa as a prescription drug allowed Amarin to target only those patients with TG levels above 500 mg/dL, but less than 2,000 mg/dL. As you can see, that market size is estimated at 3.8 million U.S. patients, which has been the source of the bulk of revenue for Amarin since 2013.
If, of course, the results of the Reduce-It study indicate Vascepa is efficacious to the patient group of TG levels between 200 mg/dL and 499 mg/dL, then a market size of 36 million potential patients, who suddenly becoming targets, would transform Vascepa to an overnight ‘blockbuster’ drug.
And not unlike Amarin’s response to the initial, yet limited FDA approval, of Vascepa, an explosion of new hires to the company’s sales force is planned. The chart, below, should provide speculators of AMRN something to think a out.
With a trebling of its sales force, Amarin projects revenue growth to potentially reach “billions” of dollars, which, of course, is arguably ‘in the bag’ following favorable results of the six-year-long Reduce-It study—all else remaining equal. And, of course, the media attention upon a successful result of the Reduce-It study could be worth more than $100 million of advertising dollars due to media coverage of a drug’s success with the FDA.
The chart, below, shows the dominance of prescription Omega-3 drugs over “non-statin prescription lipid therapy.” From the chart, we can see that starting in Q1 2013, five months following the limited FDA approval of Vascepa, market share of high-strength prescription Omega-3 has soared to more than 30% by Q4 2017, up from a single-digit percentage market share of five years ago. Due to the expected population demographics in the coming two decades of the U.S. (and Europe), this rate of climb is expected to continue its present trajectory.
And with the implication of physicians of those 36 million Americans with TG levels of between 200 mg/dL and 499 mg/dL (Exhibit A) having access to a newly-approved Vascepa, I expect the trend line shown in the chart, above, to steepen.
IS VASCEPA LIKELY TO BE ‘FULLY’ APPROVED BY THE FDA ?
In short, Vascepa is likely to be “fully” approved by the FDA.
The company is expecting a data readout in the third quarter that is likely to drastically move the share price.
Though, of course, I have no more facts pertinent to the Reduce-It study, in particular, than anyone else knowledgeable about the chemistry of Vascepa or chances of its approval by the FDA as a treatment drug for those patients with TG levels of between 200 mg/dL and 499 mg/dL. But I do know that 42 separate studies (see chart, below) have been conducted about this very question (in essence), and the overwhelming circumstantial evidence leads me to conclude that Vascepa is very likely to be approved.
A brief review of previous adjustments to the share price of AMRN following favorable news regarding Vascepa suggests that the upward adjustment to the stock price could become quite violent.
I’ve identified two game-changing milestone events surrounding the development of Vascepa during the early days of Phase III trials of the drug, and calculated the results of the price rises of each of the two cases. In addition, I note one catastrophic event, which allowed us a second shot at this stock today.
The first milestone event unfolded throughout a 22-day time period in January 2010 that ran into February 2010.
Date: Jan 11, 2010; News Release: Amarin Corporation Announces First Patients Enrolled in Two Phase 3 Clinical Trials Assessing AMR101 for the Treatment of Cardiovascular Disease
Date: Jan 28, 2010; News Release: Amarin Provides 2009 Year-End Review To Shareholders
Date: Feb 2, 2010; News Release: Amarin To Present at the 12th Annual BIO CEO & Investor Conference
Monthly Mean AMRN Price Action: +1,800%: $1.00 (Feb 2010) to $19.07 (May 2011)
Date: March 20, 2012; News Release: Amarin Announces U.S. Patent Issuance for AMR101
Monthly Mean AMRN Price Action: +70.3%: $7.15 (March 14, 2012) to $12.18 (March 22, 2012). Note: patent issuance most likely leaked on March 14, 2012, as trading volume inconspicuously spiked on that day without news.
Date: Oct. 16, 2013; News release: Amarin Announces FDA Advisory Committee Outcome For Use Of Vascepa In The Treatment Of High Triglycerides With Mixed Dyslipidemia
Monthly Mean AMRN Price Action: -60.0%: $5.17 (Oct. 16, 2013) to $2.07 (Oct. 17, 2013). Stock halted by Securities and Exchange Commission (“SEC”). The verbiage to the news release that outlined the details of the FDA advisory committee decision is as follows:
Amarin Corporation plc (Nasdaq:AMRN), a biopharmaceutical company focused on the commercialization and development of therapeutics to improve cardiovascular health, announced today that the U.S. Food and Drug Administration (FDA) Endocrinologic and Metabolic Drugs Advisory Committee has voted 9 to 2 against approval of Vascepa® (icosapent ethyl) capsules for use as an adjunct to diet and exercise and in combination with a statin in the treatment of adult patients with high triglycerides (TG 200-499 mg/dL) with mixed dyslipidemia and coronary heart disease (CHD) or a CHD risk equivalent (the ANCHOR indication) based on the information presented at the committee meeting today.
The FDA is scheduled to make its decision on whether to approve the ANCHOR Supplemental New Drug Application (sNDA) on the December 20, 2013 Prescription Drug User Fee Act (PDUFA) goal date for the application.
Vascepa is currently approved by the FDA for use as an adjunct to diet to reduce triglyceride levels in adult patients with severe ( ≥ 500 mg/dL) hypertriglyceridemia.
Following the shocking and controversial ruling by the FDA lingering in traders’ minds following the tragic October 2013 news, the share price of AMRN decline throughout the next 13 months to as low as $0.835 on Nov. 11, 2014, an 83.8% smashing of the stock.
And with the gaping hole of the number of patients excluded as potential customers (36 million) due to the October 2013 decision by the FDA, we fast-forward to today—when, within five months, the fate of Amarin’s 36-million-strong market to the company’s top line will most likely be sealed.
Either AMRN booms or busts!
AN ESTIMATE OF AMARIN’S REVENUE AND MARKET CAPITALIZATION
With an FDA approval that I suspect is coming, what would Amarin’s top line look like? Is it reasonable to say that $1.0 billion of revenue within three years is likely? I think so, and Amarin management thinks so, as well.
Here are my very conservative assumptions, and the math that takes me to revenue of $1.3 billion within three years. And I suggest that $1.3 billion is my baseline estimate.
My assumptions are as follows:
Assumption 1: Average patient population served by each of the 400 sales representatives planned to be deployed by the company remains constant with the patient population presently served by 135 sales representatives.
Assumption 2: The increase to 400 sales representatives is the first of two more increases (250 more/per year for two years) to the headcount of sales representatives. This assumption assumes a three-year roll-out of added sales representatives to serve a 9.47-fold increase of its market of 36 million additional potential customers.
Assumption 3: The rate of sales of Vascepa to the additional 36 million (new) population is equal to the original market population during the first three years of sales to the new population.
Assumption 4: The future revenue rate of increase from sales to the original market during the next three years is 20% (CAG). Note: this is a smaller rate of change to results reported for Q1 2018 and from guidance.
Assumption 5: Density of eligible patients/physician is twice the density of eligible patients/physician prior to FDA approval. With 9.47-times more patients with TG between 200 mg/dL and 499 mg/dL (popuation: 36 million) than patients with TG greater than 500 mg/dL (population: 3.8 million), a density adjustment of only 2-times (not 9.47-times) is quite conservative, in my opinion.
Okay, let’s put all the assumptions together in a spreadsheet, along with revenue and sales personnel data we have already from Amarin 10-K reports and presentation materials.
From the spreadsheet (column F), below, I calculated a combined revenue of $450.43 million generated from the two patient groups, following a full year of earnest market penetration of the new population group; $1.04 billion following two full years; and $1.30 billion following three full years of earnest market penetration.
This analysis doesn’t include the rate of market share expected without the approval of Vascepa for the patient group with TG levels between 200 mg/dL and 499 mg/dL. The impact of media upon the awareness level of Vascepa following an FDA approval might accelerate the baseline marketshare that has been projected for prescription-strength pure omega-3 eicosapentaenoic acid (EPA) (Exhibit C).
Remember, Vascepa is a pure, second-generation EPA product, unlike GlaxoSmithKline’s first-generation product, Lovaza, the latter of which is a combination EPA and DHA product (see chart, below) and, therefore, is vulnerable to a loss of significant market share following the introduction of Vascepa to the marketplace.
By taking a projected revenue of $1.3 billion and a 4.91 price-to-sales multiple (today’s P/S multiple), a rough estimate of Amarin’s future market capitalization calculates to $6.39 billion, which is a 7.17-times jump from today’s market capitalization of company.
If I calculate a risk/reward ratio to the AMRN trade, the stock price revisiting the $19 level ($2.86 x 7.17 = $20.51) of May 2011 is not unreasonable, given the implications of Amarin’s potential revenue growth that I have included in this report.
On some positive news in the third quarter, shares might see $8 a share. In anticipation of that event, I also expect a strong run up!
Based on these longer term calculations, if everything goes perfectly, we might see $16 a share or higher – making this a potential “jackpot” trade.